CHAPTER XXXIX

CONSTITUTIONAL LIMITATIONS UPON THE TAXING POWERS OF THE STATES

Constitutional provisions

The Constitution lays but one important express limitation upon the States with reference to the exercise of their taxing powers. This is that "no State shall, without the consent of Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing the inspection laws; and the net produce of all duties and imposts, laid by any State on imports or exports, shall be for the use of the treasury of the United States, and all such laws shall be subject to the revision. and control of the Congress."

But other clauses of the Constitution restricting generally the powers of the States operate to limit their powers of taxation. Thus, for example, influential in this respect are the provisions that no State shall deprive any person. of property without due process of law or deny to any person within its jurisdiction the equal protection of the laws; that no State shall pass any law impairing the obligation of contracts; and that "the citizens of each State shall be entitled to all privileges and immunities of citizens in the several States." Also there are the implied limitations that no State shall so use its taxing powers as to interfere with the operation of Federal agencies; and that, being unable to give an extra-territorial effect to its laws, no State may tax property not within its jurisdiction.

The limitations imposed upon the taxing powers of the States by the "comity" clause are elsewhere discussed

in this treatise. It may, however, be here said that, in general, the clause operates to prevent a State from burdening citizens of other States within its borders with heavier taxes than those laid upon its own citizens. This applies not only to the property of non-citizens, but to the business that they may carry on.

State taxation of Federal governmental agencies

The successful maintenance of a Federal government, under any circumstances a most difficult task, is an especially difficult one in the United States where Federal functions are exclusively performed by Federal organs and agencies, and State functions by State organs and agents. This has necessitated the maintenance of a complete machinery of government for the United States, and similarly, a complete political organization for each of the member States of the Union. This arrangement carries with it the general doctrine that the States may not in any wise interfere with the operation of a Federal organ or with the exercise by a Federal agent of his official functions; and that, conversely, the Federal Government may not interfere with the operation of a State agency or the official actions of State officials when acting within the constitutional limits reserved to the States. Illustrations of these general principles will appear throughout this treatise. Their scope and significance are, however, especially exhibited in their application to the Federal and State taxing power, and to a discussion of this special phase of the subject this and the next succeeding paragraphs will be devoted. That a State may not in the exercise of its reserved powers, interfere with a Federal Governmental agency was settled once and for all by the decisions of the Supreme Court in McCulloch v. Maryland. This case was all the

14 Wh. 316; 4 L. ed. 579. See, also, Osborn v. Bank of United States, 9 Wh. 738; 6 L. ed. 204.

stronger in that the Federal agency, with whose activity it was alleged that Maryland had attempted to interfere by taxing it, was an agency neither essential to the National Government nor expressly provided for by the Constitution. The power to establish a National Bank was at most only an implied one, and, in fact, its constitutionality was very widely denied, and, years after this, a bill providing for the establishment by the National Government of a similar institution was vetoed by President Jackson upon the ground of its unconstitutionality. But in this case Maryland had not only denied the constitutionality of the bank but had taken the position that, even were it constitutional, she had, under the general power reserved to her of taxing all occupations carried on within her territorial limits, the right to tax such branches of the bank as might be located within her borders. Thus, in this case, the State of Maryland did not claim that she might directly and deliberately interfere with a Federal law, but that the exercise by her of an otherwise legitimate authority could not be declared unconstitutional simply upon the ground that, indirectly, or by remote possibility, its effect was, or might be, to interfere with the exercise of a legitimate Federal power. In other words, Maryland took the ground that, while acting within their reserved spheres of authority, the States were as independent and sovereign as was the Union while operating within its constitutional sphere; and that, therefore, their direct interests, within such spheres, might not be subordinated to the merely indirect interests of the Union. This position the Supreme Court declared an invalid one.

Property of Federal agencies may be taxed

In McCulloch v. Maryland and Osborn v. Bank of Ohio the States had attempted to levy a tax, in the nature of a franchise tax, upon the operations of the Federal bank.

In the Maryland case Chief Justice Marshall said: "The opinion does not deprive the State of any resources which it originally possessed. It does not extend to the tax paid by the real property of a bank, in common with the other real property within the State, nor to a tax imposed on the interest which the citizens of Maryland may hold in this institution, in common with other property of the same description throughout the State."

This dictum of Marshall received judicial application in Thomson v. Union Pacific R. Co.,2 in which it was held, that in the absence of any legislation of Congress directing otherwise, the property of a railroad company, chartered by a State, but performing Federal services, might be taxed by the State. Chief Justice Chase speaking for a unanimous court said: "We think there is a clear distinction between the means employed by the government and the property of agents employed by the government. Taxation of the agency is taxation of the means; taxation of the property of the agent is not always, or generally, taxation of the means."

In Thomson v. Union Pacific R. Co., the railroad company concerned, although performing Federal services, was chartered by the State. In Union Pacific R. Co. v. Peniston, the same doctrine was applied to a company chartered by Congress. This fact, it was held, did not take the case out of the rule laid down in earlier cases.

3

In Owensboro National Bank v. City of Owensboro 4 it was held that the property of national banks, organized under a Federal statute, is absolutely exempt from State taxation except in so far as Congress has expressly waived this immunity. This doctrine would be in opposition to

29 Wall. 579; 19 L. ed. 792.

318 Wall. 5; 21 L. ed. 787. See, also, National Bank v. Commonwealth, 9 Wall. 353; 19 L. ed. 701.

4 173 U. S. 664; 19 Sup. Ct. Rep. 537; 43 L. ed. 850.

that declared in Union Pacific R. Co. v. Peniston but for the distinction between the national banks as, in themselves, governmental instrumentalities of the United States, and the railroads which are primarily private enterprises, but performing inter alia Federal services.

A franchise to be or to act as a corporation granted by a State, may be taxed by a State as a piece of intangible property. But franchises or other rights derived from the Federal Government may not be taxed by the States nor any hindrances placed by the States upon their exercise.5

In conformity with the foregoing doctrine it has been held that while the States may tax the capital employed in the manufacture of copyrighted or patented articles, as well as the tangible property embodied in these articles, they may not exact a fee as a condition precedent to the exercise of these federally granted rights, nor can they tax the intangible rights themselves as property.

Of course no State may, in the exercise of its police or other powers, in any way discriminate against patented articles.6

Where, by Federal license, an occupation. has been authorized by the United States, enjoyment and employment of the license may not be restricted by a State.7

That the salary or other emoluments of office of Federal officials may not be taxed by the States has not been

5 California v. Central Pacific Ry. Co., 127 U. S. 1; 8 Sup. Ct. Rep. 1073; 32 L. ed. 150.

6 Crown Cork & Seal Co. v. Maryland, 87 Md. 687; People v. Roberts, 159 N. Y. 70. See, also, Webber v. Virginia, 103 U. S. 334; 26 L. ed. 565; Allen v. Riley, 203 U. S. 347; 27 Sup. Ct. Rep. 95; 51 L. ed. 216; and Ozan Lumber Co. v. Union Co. Nat. Bank, 145 Fed. 344.

7 Moran v. New Orleans, 112 U. S. 69; 5 Sup. Ct. Rep. 38; 28 L. ed. 653; Harman v. Chicago, 147 U. S. 396; 13 Sup. Ct. Rep. 306; 37 L. ed. 216.